Many entrepreneurs dream of self-funding their business without having to use investors or bank loans. Entrepreneurs tend to buy into the allure that they should be the next bootstrapped billionaire, however, they don’t consider the potential financial risks.
Bootstrapping is essentially using your own funds to run your business. You use money you have on hand in order to help your company succeed. This could be through using personal savings, credit cards, 401Ks, second mortgages, as well as reinvesting your own income. You may even have a second job to fund your small business as it grows.
You may be asking yourself, why would business owners want to use their own funds if it is risky to do so? The main reason is because individuals like to turn to easiest-to-access resources when it comes to finances. This is understandable especially when a startup loan often requires a 6-month business history.
There are a few benefits of self-funding your business. One of these is having power over your decisions. Without investors and banks involved, you have complete control of operating and growth choices.
For example, if you want to drop a client you don’t enjoy working with, you can do this as you do not need to meet a specific income level to be able to pay down debt. You can also pursue opportunities that may be a little risky.
One downside of having investors is that you may have to compromise your personal values and beliefs, but if you are self-funding you will not have to meet anyone else’s expectations.
Although there are a handful of benefits to bootstrapping, there are some dangers to keep in mind. The biggest downside to self-funding is burnout. Companies that are self-funded can possibly have some serious physical or mental health problems for the owners. The burnout can come from working long hours but also due to financial stress since you do not have any assistance with funding your business.
Another danger is running out of money. Unfortunately, money is not an unlimited resource. As your small business grows, your expenses will increase and you may not have the proper funds available to help with emergencies when they arise. You may also notice that they may not you don’t have the money to take advantage of growth opportunities. From equipment, hiring employees to advertising, your business may run into issues if there is lack of capital limiting your growth.
What are the solutions to these dangers? Bootstrapping can still be a great option for you, however, consider finding a partner or other investors to assist you. You could also look into other financing options that are available specifically for new businesses. These financing opportunities can be helpful so that you can be prepared and take advantage of important opportunities.
